Saving enough for a mortgage deposit can be a years-long battle. And with house prices constantly rising, the amount you need just keeps on growing the longer you save. So, you might be wondering if you can shortcut the process by simply borrowing the money.
While this isn’t as easy as you might hope, it is possible, in the right circumstances. We’ll explain your options, which include a government equity loan, a private equity loan, and an unsecured loan.
We’ll cover the following topics…
In this article:
- Can you get a loan for a mortgage deposit?
- Can you use a credit card or overdraft for a mortgage deposit?
- Taking out a director’s loan for a mortgage deposit
- How to get a mortgage using a loan for your deposit
- Lenders and eligibility criteria
- Can you borrow money from family for a mortgage deposit?
- Finding a broker
Can you get a loan for a mortgage deposit?
Yes. If you have saved a small deposit (5% of the property value), there are various lenders who will lend you up to 25% of the property value as an equity loan, which you can put towards your mortgage deposit.
However, there are upsides and downsides to consider. For example, increasing your deposit this way can help you to secure a better rate on your mortgage, but only a handful of lenders will consider your application. There are also fees involved and you might end up paying a high interest rate on the loan.
Alternatively, you can use an unsecured loan to boost your mortgage deposit. Again, only a handful of lenders will allow this, as most lenders are too risk-averse; they prefer to be the only major debt you’re paying off. But, if you have very few other debts and your income will easily cover the loan repayments as well as your mortgage repayments, it’s possible.
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Can you use a credit card or overdraft?
Most experts would advise that you do not apply for a mortgage if you’re planning to use a credit card or overdraft to pay the mortgage deposit. If you’re unable to save for a deposit, using a high-interest form of credit instead is very risky and doesn’t reflect well on your creditworthiness.
Still, don’t let this put you off the idea of getting a mortgage altogether. A credit card or overdraft might seem like your only option, but a quick chat with an expert might help you identify another route, so it’s worth speaking to a broker.
Using a director’s loan
If you have your own limited company, you may have needed to put a sum of your own money into getting the business up and running (i.e. make a director’s loan). Many business owners do this at the expense of saving for a mortgage deposit.
The good news is that once your limited company has enough retained profits, you can take that money back out (i.e. repay the director’s loan). Many lenders will allow you to use this money towards your mortgage deposit.
Director’s loans work both ways: you can put money into your business and later withdraw it, or you can borrow money from the business and later repay it. However, you can only use a director’s loan as a mortgage deposit if it is being repaid, not borrowed. You can find more useful tips in our guide to mortgages for company directors.
How to get a mortgage using a loan for your deposit
Here’s a three-step process for getting mortgage approval with a borrowed deposit:
1. Speak to an expert
Before you borrow any money, you should seek expert advice. You’ll want to discuss whether this is the best way for you to get a mortgage, which type of loan you need, how much you should borrow, and what your other options are. Speak to a broker for personal, impartial advice. If you’d like us to connect you with one, get in touch.
2. Apply for the loan
If an expert agrees that this is the best route to homeownership for you, you can proceed with your loan application. The specifics of the application process will depend on whether you choose an unsecured personal loan or an equity loan.
3. Find the right mortgage lender
Remember that most lenders will not accept borrowed deposits, so you’ll only have a few options to choose from. Your broker can identify the best rate available to you and recommend the lender that’s the best fit.
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Lenders and eligibility criteria
Generation Home, Barclays, Kensington Mortgages, Tipton Building Society, and Stafford Railway Building Society can potentially consider deposits partially sourced from privately funded equity loan providers.
Santander, Norton Home Loans, Saffron, and Together will all consider deposits sourced from personal loans. You’ll need to provide details of the lender, loan amount and terms, and details of security on the loan. Besides that, you’ll need to meet the lender’s other eligibility criteria covering age, income, employment status and more.
Unfortunately, not all applications for a mortgage with a borrowed deposit will be successful. Your application will be reviewed in detail, so we’d advise you to work with a broker to ensure it stands up to scrutiny.
Is borrowing from family an option?
Gifted deposits from family members are common for first-time buyers and are accepted by almost all lenders. Unfortunately, loaned deposits from family members are not treated the same way and approval will depend on the agreed terms of the loan.
If your family members agree that the loan is only due for repayment when you sell your home in the future, it’s likely you can get a mortgage. As long as the loan is the second charge (i.e. the mortgage must be repaid before the loan is repaid) and there are no monthly repayments involved, around 15 lenders will consider your application.
Your family members may not be in a position to lend money on these terms. If they would prefer you to make monthly repayments, the loan will be considered in the same way as any other unsecured personal loan, i.e. a handful of lenders might accept it.
Before taking out a loan, it’s worth considering your other options.
The government currently offers three initiatives designed to help buyers who are struggling to save a large deposit:
- The mortgage guarantee scheme makes it less risky for lenders to offer 95% mortgages. This means that many people are able to buy a home with only a 5% deposit. Read more in our guide to 95% mortgages.
- The Help to Buy scheme provides an equity loan to first-time buyers who buy a newly built property from an approved homebuilder, so they too can buy with only a 5% deposit. Read more in our guide to Help to Buy.
- The Shared Ownership scheme allows people who can’t afford to buy a home to instead buy just a portion of it, renting the remaining portion from a housing association. Read more in our guide to Shared Ownership.
Other alternatives include using equity from another property you own or using your pension lump sum as a deposit, if you’re an older borrower approaching retirement.
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Get matched with a broker to help with your deposit choices
Since this is an unconventional route to homeownership, you’ll find that many brokers haven’t handled this type of application and so won’t be able to give you the best advice. You’ll need to find someone with the right experience.
We offer a free broker-matching service that’s designed to connect homebuyers with a specialist in cases like theirs. If you’d like to speak to a broker who has experience with borrowed deposits, we can put you in touch with one. Just call us on 0808 189 2301 or make an enquiry online.
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